Equities are holding the line after FOMC Equities are holding the line after FOMC Equities are holding the line after FOMC

Equities are holding the line after FOMC

Equities 5 minutes to read
PG
Peter Garnry

Head of Equity Strategy

Summary:  Despite the FOMC volatility, USD repo market stress and macro numbers still mixed US equities are managing to hold the line close to all-time highs. In India sentiment got help from the government lowering the corporate tax rate. In today's equity update we also talk about valuation on software companies and earnings next week from Nike and Micron Technology.


The FOMC smelled of missed opportunity for the Fed to get ahead of the curve and the complacency on the US-China trade war and recently ongoing stress in the USD repo market. Despite this backdrop US equities are close to all-time highs as we leave this central bank week and preparing for next week which will be very exciting on the macro release front. Most notably the Eurozone and US flash PMIs on Monday will move the market and for rates traders the US PCE inflation (Aug) figure on Friday will be an important data point.

We suspect next week to be a tug of war between the bulls and bears in equities. If the S&P 500 futures manage to climb to new all-time highs, then we expect shorts to vanish like water in the Sahara. This will clear the path for higher equities despite the muddy macro picture. While remain negative on macro we cannot ignore the technical price action.

Source: Saxo Bank

As we have said on our daily Market Call podcast India is a train wreck with credit worsening and consumer confidence measured by new car registrations plummeting. However, today news broke that the Indian government is stimulating the economy through cutting the corporate taxes for new domestic companies. The Nifty 50 Index was up 4% breaking above the recent trading range but in the greater picture (see chart) the technical picture looks ugly. As long as the global economy is slowing down and the USD remains strong India is an equity market investors should underweight.

Source: Saxo Bank

While US equities are flirting with record highs it is worth noting that the second largest industry group Software & Services is now valued in the 99% percentile on EV/EBITDA; not a good recipe for future returns. We often just talk about valuations as something abstract but the one as to realize that EV/EBITDA just above 20x means that an implied return expectation by investors of around 4.8%. Is that really a fair hurdle rate to expect for your capital given where we are in the business cycle? Our view is that valuations on software companies have reached unsustainable levels given the outlook and the risk-reward ratio is just terrible.

While the Q3 calendar period is not over yet some companies, that are not following the strict calendar year, are still reporting earnings. Nike reports FY20 Q1 earnings on Tuesday with analysts expecting EPS of $0.701 up from $0.67 a year ago. Analysts expect revenue to continue growing by high-single-digit driven by expansion in its woman’s business and e-commerce. Nike’s margins have lately been under pressure so there will be a great focus on this issue from analysts on the conference call. Nike’s valuation on EV/EBITDA is 24.9x which is a steep premium to the S&P 500 ratio of 13.4x.

From a macro point of view the FY19 Q4 earnings release from Micron Technology is of importance as the memory manufacturer sits in the middle of the global economic slowdown and escalating trade war. Analysts expect Micron Technology to deliver EPS of $0.478 down from $3.53 a whopping decline of 86.5%. Analysts are split on the company’s outlook with the current price at the current consensus price target.

Disclaimer

The Saxo Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website is not intended to and does not change or expand on this. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.

Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-hk/legal/disclaimer/saxo-disclaimer)

None of the information contained here constitutes an offer to purchase or sell a financial instrument, or to make any investments. Saxo does not take into account your personal investment objectives or financial situation and makes no representation and assumes no liability as to the accuracy or completeness of the information nor for any loss arising from any investment made in reliance of this presentation. Any opinions made are subject to change and may be personal to the author. These may not necessarily reflect the opinion of Saxo or its affiliates.

Saxo Capital Markets HK Limited
19th Floor
Shanghai Commercial Bank Tower
12 Queen’s Road Central
Hong Kong

Contact Saxo

Select region

Hong Kong S.A.R
Hong Kong S.A.R

Saxo Capital Markets HK Limited (“Saxo”) is a company authorised and regulated by the Securities and Futures Commission of Hong Kong. Saxo holds a Type 1 Regulated Activity (Dealing in Securities); Type 2 Regulated Activity (Dealing in Futures Contract); Type 3 Regulated Activity (Leveraged Foreign Exchange Trading); Type 4 Regulated Activity (Advising on Securities) and Type 9 Regulated Activity (Asset Management) licenses (CE No. AVD061). Registered address: 19th Floor, Shanghai Commercial Bank Tower, 12 Queen’s Road Central, Hong Kong.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products may result in your losses exceeding your initial deposits. Saxo does not provide financial advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo does not take into account an individual’s needs, objectives or financial situation. Please click here to view the relevant risk disclosure statements.

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-hk/about-us/awards.

The information or the products and services referred to on this site may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and services offered on this website are not directed at, or intended for distribution to or use by, any person or entity residing in the United States and Japan. Please click here to view our full disclaimer.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc. Android is a trademark of Google Inc.